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What is Bank Guarantee

Bank Guarantee is normally required to secure Government Contracts.

Government gives contract for work only if business submits this Bank  Guarantee

This guarantee secures the Government that if Business fails to meet contract terms,Bank will pay Government the damages

 

 

 

Procedure for Bank Guarantee (Example)

  • Company wants Government Contract
  • Government puts condition on company to give Bank Guarantee of a fixed amount.
  • Now Company approaches Bank for issue of Bank Guarantee
  • Bank asks for FD of a fixed amount as security and charges commission to issue Bank Guarantee
  • Contract is completed
  • Bank Guarantee revoked
  • FD Returned including Interest on FD

 

Effect

Company pays commission and receives interest On FD

 

 

 

Assignment

Company wanted to apply for a Government Contract with Railway Mininstry

where company would sell goods to Government of Rs 100 lacs

To secure contract,Bank Guarantee of 40.00,000 was required.

Company took this  Bank Guarantee from PNB Bank of Rs 4000000 for 3 months

Bank took 2 % Commission p.a. and Asked for 25% Margin money in the form of a FD

Interest earned on FD was 8% p.a

Government Contract completed and money received from government 

Bank Guarantee revoked

FD Returned including Interest on FD

Pass Entries in books of company

-a-

Commission charges on bank guarantee:

          Commission charges    A/c    Dr      20000

                                                To     Bank A/c    20000

 (4000000*2%*3/12)

25% Margin money in the form of FD :

          8% FD         A/c    Dr      1000000

                             To     Bank A/c    1000000

 

Interest Earned on FD:

          8% FD         A/c    Dr      20000

                   To     Interest Income   A/c    20000

 

At the time bank guarantee was revoked and FD was matured:

          Bank A/c    Dr      1020000

                   To     8% FD         A/c    1020000

         

 

 

 

Points to Remember:

  • No entry is passed for issue of a bank guarantee.
  • Bank guarantee is a contingent liability, hence shown in notes to accounts in financial statements.

-ea-

 

  1. Accounts and Finance
  2. Step 2 Passing Routine Entries
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About the Author

CA Maninder Singh's photo - Expert in Practical Accounts, Taxation and Efiling
CA Maninder Singh
CA Maninder Singh is a Chartered Accountant for the past 7 years. He provides courses for Practical Accounts, Taxation and Efiling at teachoo.com .
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